For the fifth time since May, the central Bank of Indonesia has increased its benchmark interest in an attempt to protect the rupiah from being affected by emerging markets globally. Based on the predictions of the larger part of the 37 economists interviewed in a Bloomberg survey, the seven-day reverse repurchase rate was increased by 25 basis points to 5.75 percent. Though, eight of them forecasted that there would be an aggressive action of 50 basis improvement.
The move made on Thursday ensured the entire amount of rate hikes in the last four months reach 1.5 percentage points, thereby making the Bank of Indonesia one of the most active central banks in the Asian region in this year that is tackling the market commotion that most developing economies are facing currently. The central bank Governor is more vigilant and on the lookout as there is an increase in the interest rates and escalation of trade tensions, which are causing irreparable damage to the foreign outflows.
According to the Governor, the stance of Bank Indonesia remains hawkish and preventive and ahead-of-the-curve measures will be taken. He also added that these procedures would be based on domestic and global dynamics and developments as well as those associated to the progress in the policy normalization of the Fed, trade war tension, and the behavior of global investors on Indonesia. In conclusion, he suggested the future policy action will be based on data.
The decision was reached a day after the interest rate was increased by the Fed for the third time in this year, with more tightening signs coming soon. The Philippine central bank also increased its benchmark rate by 50 basis points to 4.5 percent after the move was taken by Bank Indonesia, thereby moving its aggregate rate hikes since May to 1.5 percentage points.
It was on record on Thursday that the Rupiah lost nine percent against the US dollar this year, thereby making it the worst currency in Asia after India’s Rupee. Rupiah reduced to less than 0.1 percent to 14,914 against the dollar by 3 pm in Jakarta on Thursday. Apart from the increase in rates and the intervention in foreign exchange, the government has introduced import curbs to ensure the current-account deficit is not widened.
According to the Indonesia Central Bank Governor, Warjiyo, he opined that the decision is in harmony with concerted efforts to reduce the current-account deficit till it gets to a safe limit and ensure the maintenance of the appeal of domestic financial markets so that the external flexibility of Indonesia can be strengthened in the midst of prevalent global fears that are still on the high side.
The central bank forecast economic growth at five percent to 5.4 percent this year, with an expected inflation rate staying within 2.5 percent to 4.5 percent target in 2018 and 2019.
According to Wisnu Wardana, a renowned economist at PT Bank Danamon Indonesia, he said the move is in alliance with the continual pressure on the rupiah from the trade account and foreign net sale of rupiah-denominated assets. He said there is another anticipation of a 25 basis points rate increase by the end of the year.
The Bank Indonesia announced the launching of a domestic non-deliverable forward market, which will serve as an option for companies that want to hedge their dollar exposure and assist in the curbing of the volatility of Rupiah. The action is seen as a means of balancing the government’s efforts in the promotion of exports and maintaining moderation in the rate of importation.
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